Inventory

1. Inventory • Stock of items held to meet future demand • Tangible goods • Intangible goods • Inventory management answers two questions • How much to order? • When to order?

2. Types of Inventory • Raw materials • Purchased parts and supplies • Labor • In-process (partially completed) products • Component parts • Working capital • Tools, machinery, and equipment • Finished goods

3. Reasons To Hold Inventory • Meet unexpected demand • Smooth seasonal or cyclical demand • Meet variations in customer demand • Take advantage of price discounts • Hedge against price increases • Quantity discounts

4. Two Forms Of Demand • Dependent • items used to produce final products • Independent • items demanded by external customers

5. Inventory Costs • Carrying Cost • cost of holding an item in inventory • Ordering Cost • cost of replenishing inventory • Shortage Cost • temporary or permanent loss of sales when demand cannot be met

6. Inventory Control Systems • Fixed-order-quantity system (Continuous) • constant amount ordered when inventory declines to predetermined level • Fixed-time-period system (Periodic) • order placed for variable amount after fixed passage of time

7. ABC Classification System • Demand volume & value of items vary • Classify inventory into 3 categories Class % of Units % of Dollars A 5 - 15 70 - 80 B 30 1515 C 50 - 60 5 - 10

8. ABC Classification Example

9. Assumptions Of Basic EOQ Model • Demand is known with certainty • Demand is relatively constant over time • No shortages are allowed • Lead time for the receipt of orders is constant • The order quantity is received all at once

10. Demand rate Order qty, Q Inventory Level Reorder point, R Lead time Lead time 0 Time Order Placed Order Received Order Placed Order Received The Inventory Order Cycle

11. EOQ Cost Model CO - cost of placing order D - annual demand CC - annual per-unit carrying cost Q - order quantity Annual ordering cost = Annual carrying cost = Total cost = +

12. EOQ Model

13. Total Cost at Q*

14. Slope = 0 Annual cost ($) Total Cost Minimum total cost Carrying Cost = CcQ/2 Ordering Cost = CoD/Q Order Quantity, Q Optimal order Qopt EOQ Model Cost Curves

15. EOQ Example CC = $0.75 per yard CO = $150 D = 10,000 yards Find EOQ, TC at Q*, # of order/year, and cycle time NOTE: store days = 311

16. EOQ Example

17. Orders per/yr and Cycle Time

18. Inventory level Maximum inventory level Q(1-d/p) Begin Order receipt Average inventory level Q 2 (1-d/p) 0 Time End Order receipt Order receipt period EOQ With Noninstantaneous Receipt

19. EOQ With Noninstantaneous Receipt p = production rate d = demand rate

20. EOQ With Noninstantaneous Receipt

21. Production Quantity Example CC = $0.75 per yard CO = $150 D = 10,000 yards d = 10,000/311 = 32.2 yards per day p = 150 yards per day

22. Optimum Q - Q*

23. Total Cost

24. Production Run and Max Inv. Levels Production run = Q/p = 2,256.8/150 = 15.05 yards Number of production runs = D/Q = 10,000/2,256.8 = 4.43

25. Safety Stocks • Safety stock • buffer added to on hand inventory during lead time • Stockout • an inventory shortage • Service level • probability that the inventory available during lead time will meet demand

26. Capacity Constraints Strategic Objectives Company Policies Demand Forecasts Financial Constraints Aggregate Production Planning Size of Workforce Units or dollars subcontracted, backordered, or lost Production per month (in units or $) Inventory Levels Inputs and Outputs to Aggregate Production Planning

27. Items Production Planning Capacity Planning Resource level Product lines or families Aggregate Resource Plants Production Plan Requirements Plan Individual products Critical work centers Master Production Rough-Cut Schedule Capacity Plan All work centers Material Capacity Components Requirements Plan Requirements Plan Manufacturing operations Individual machines Shop Floor Input/Output Schedule Control Hierarchical Planning Process